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United States: Virtual Currencies Regulatory Overview (and Comparative Guide)

Bull Blockchain Law LLP via Mondaq| Andrew Bull and Tyler Harttraft  | Feb 22, 2021

virtual currency regulation in the US - United States: Virtual Currencies Regulatory Overview (and Comparative Guide)

In broad terms, which legislative and regulatory provisions govern virtual currencies in your jurisdiction?

In the United States, federal and state regulations and laws govern virtual currencies. While the US Congress has proposed federal legislation over the last two years, Congress has yet to pass any form of legislation directly addressing virtual currencies. Instead, governmental agencies – such as the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Office of the Comptroller of the Currency and the Financial Crimes Enforcement Network (FinCEN) – provide guidance through reports and administrative decisions.

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Additionally, US federal courts continually create precedent by applying traditional authoritative statutes through judicial determinations regarding virtual currencies. Overall, a significant portion of the regulatory provisions governing virtual currencies in the United States are from:

  • guidance released by a governmental agency;
  • case-by-case administrative decisions by a governmental agency; and
  • federal and state court rulings.

Which legislative and regulatory provisions govern entities that provide services relating to virtual currencies? Must they be registered or licensed by a regulatory authority?

Companies that issue digital securities must either register with the SEC or find an exemption to the Securities Act of 1933. This typically involves filings with the SEC.

Companies conducting virtual currency transmission are considered a ‘money service business' under the Bank Secrecy Act, and therefore must register as a money service business with FinCEN. Depending on the specific business that the entity conducts, it may also need a money transmitter licence in the state in which it conducts business. For example, Coinbase, one of the largest cryptocurrency exchanges in the world, has money transmitter licences in every state.

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Any company dealing in virtual currency futures in the United States must typically register with the CFTC as a futures commission merchant. This is governed by the Commodity Futures Act.

Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The SEC, the CFTC, FinCEN and the Internal Revenue Service are all federal agencies that possess the administrative power to enforce regulations against entities operating under their respective authority. This authority stems from the federal acts that grant each agency the authority to regulate. In other words, if a company violates a regulation that falls under the authority of one of the governmental agencies, that agency can bring federal administrative proceedings against the entity.

Federal and state courts deal with judicial issues arising in the industry. Courts have the ability to made judicial rulings and set precedent, depending on the court.

The US Congress has yet to provide any legislation in the virtual currency industry.

State legislatures have passed legislation that addresses different aspects of the virtual currency industry.

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What is the regulators' general approach to virtual currencies?

The approach is mixed, for lack of a better term. It wholly depends on the governmental agency. For example, the SEC – considered the most active agency regarding virtual currencies – takes an ad hoc approach to issuing fines and punishing companies that violate the Securities Act. In contrast, the CFTC, which possesses similar powers to the SEC in the futures trading context, have not issued nearly as many administrative rulings.

Overall, the United States is considered a strict jurisdiction for conducting virtual currency business, due to the significant amount of regulations and various governmental agencies that each company must consider.

Has there been any notable enforcement action relating to virtual currencies?

Yes. The most recent – and certainly the highest-profile – case to date involves enforcement actions against San-Francisco-based Ripple Labs Inc, the company behind XRP. In December 2020 the SEC filed a complaint alleging that Ripple – along with Brad Garlinghouse and Chris Larsen, both Ripple executives – had raised $1.3 billion in capital for Ripple by selling over 14.6 billion XRP tokens through an unregistered security offering. This case is ongoing.

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In 2019 the SEC determined that Block.one had violated the registration provisions of the federal securities laws and required the company to pay a $24 million civil monetary penalty. Block.one consented to the order without admitting or denying its findings.

Overall, the SEC has charged around $175 million in total fines to date, while the CFTC has levied about $23 million in fines and other charges.

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